A client called me this week on a property he was buying in Las Vegas. He was buying it from a “turnkey” company. This is a company or even a single investor who buys property, fixes them a little (paint and carpet and maybe a new door and grass, even fake grass in this case), then rents them out, and then sells them to new investors.
He sent me the info on the property. He was paying $250,000 for a so-so neighborhood, and the rental income would be $1650 per month (though the turnkey company said $1900). I checked with a friend of mine who lives in Vegas, and he said the rents were a little high at $1650, and definitely not $1900.
Then I looked at the expenses, and after all expenses and maintenance reserves, there would be $200 per month left in cash flow. The down payment was $50,000, but my client had forgotten to include closing costs as part of his investment, which were $5000.
So $2400 per year income divided by the investment of $55,000 would be a 4.3% return. If there were any big expenditures, it would be wiped out.
The turnkey people had said the monthly cash flow was $500 per month because they had nothing for repairs, the insurance policy was low, and had estimated the gross rent at $1900 instead of the reality of $1650.
When I checked the sales comparables, it turned out there were cheaper properties around this one, so IF it appraised out at this price, he definitely would be paying top dollar.
After reviewing all the data, he was happy but also disappointed to walk away and find a better return or ROI.